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00:00:19:05 - 00:00:21:07
Well, welcome back, everybody,
to Markets Mindset.
00:00:21:08 - 00:00:22:02
It's been a while.
00:00:22:04 - 00:00:25:21
I have with me, as always, Moshe Tomkiewicz, head of DCM here at Mizuho.
00:00:25:21 - 00:00:30:06
And Moshe, it's been an interesting, I'll say, post-Labor Day period.
00:00:30:11 - 00:00:33:15
To give you an idea of the background before we get into it.
00:00:33:17 - 00:00:37:21
We've had record supply for the last three
months, three monthly records in a row.
00:00:37:23 - 00:00:42:05
We went from being negative
gross supply to positive.
00:00:42:06 - 00:00:44:10
We're now up 9% on the year gross supply,
00:00:44:10 - 00:00:49:23
6% positive on a net supply basis, although
we're actually negative net supply
00:00:49:23 - 00:00:55:03
if you take into account that we've already paid down $140 billion of maturities for 2026.
00:00:55:07 - 00:00:59:00
When we walked into this year, 2026 was supposed to be over $1 trillion in maturities,
00:00:59:00 - 00:01:02:19
which I think some dealers are still counting. But we've actually paid down $140 billion
00:01:02:19 - 00:01:07:15
of that already, and we're down to $880 billion staring us in the face for 2026.
00:01:07:17 - 00:01:11:01
But at that exact same time, we got hit with,
00:01:11:01 - 00:01:14:19
let’s call it, for something, lack of a better term, the data center issue,
00:01:14:19 - 00:01:18:01
which came up and the supply out of the tech center at the exact same time.
00:01:18:03 - 00:01:24:08
And we've seen spreads retrench from a low of 71/72 around September
00:01:24:08 - 00:01:27:07
to now hitting 84/85 on the index.
00:01:27:07 - 00:01:30:23
And interestingly enough, the first move wider
was on September 19th,
00:01:30:23 - 00:01:35:08
just after the Oracle transaction on the 18th,
and the second move wider
00:01:35:08 - 00:01:38:14
was after the Meta transaction on October 30th.
00:01:38:14 - 00:01:41:11
And in between was the announcement that
00:01:41:11 - 00:01:45:21
the Beignet transaction, the data center deal backed by leases of Meta, had also hit.
00:01:45:22 - 00:01:48:01
So you had a ton of supply come in that period.
00:01:48:03 - 00:01:51:05
And since then, we've been just
proceeding higher in spreads.
00:01:51:07 - 00:01:52:22
Where do you think we're going in spreads?
00:01:53:00 - 00:01:55:12
How do you think we're going to enter 2026?
00:01:55:14 - 00:01:58:01
And what's your view forward?
00:01:58:03 - 00:02:06:00
So I think December is going to tell us a lot
about what to think about longer term.
00:02:06:02 - 00:02:08:19
You have the Fed on the 10th.
00:02:08:21 - 00:02:12:10
We expect an active week in the market
that first week in December.
00:02:12:12 - 00:02:16:01
And then we're going to be in a period
of basically no supply.
00:02:16:03 - 00:02:18:21
And if there's supply, it's just going to be episodic.
00:02:18:23 - 00:02:25:01
So that is the time for this market to
recharge the technical battery.
00:02:25:03 - 00:02:31:17
If we're able to get below, let's call it 80 on
an index spread perspective, which
00:02:31:17 - 00:02:36:04
let's call it 5/6 tighter than where we
are right now, then we could have room to run.
00:02:36:04 - 00:02:41:15
My guess is, is that we've hit a floor.
00:02:41:17 - 00:02:45:18
And that's just a byproduct of the supply.
00:02:45:21 - 00:02:47:20
The floor being 80 or the floor being 85?
00:02:47:22 - 00:02:51:06
I think the floor is the early September floor.
00:02:51:11 - 00:02:55:06
But I think the 80 is going to be a very
hard level to break.
00:02:55:08 - 00:02:57:17
Because I think, and I could be wrong,
00:02:57:17 - 00:03:02:19
when we get into this period of no supply,
all the buy side is going to do
00:03:02:19 - 00:03:04:22
is talk about the calendar for next year.
00:03:04:22 - 00:03:08:01
Because you're going to have
guys like me and you
00:03:08:01 - 00:03:13:12
talking about all the ingredients being sown
for a record level of issuance.
00:03:13:16 - 00:03:18:08
We're already hearing some of those numbers come out $1.7 trillion to $2 trillion
00:03:18:08 - 00:03:19:17
expected for next year.
00:03:19:17 - 00:03:22:20
I know we haven't put in our estimate yet.
00:03:22:22 - 00:03:24:22
We're going to wait because
we're going to be back.
00:03:25:00 - 00:03:26:01
Here's a shameless plug.
00:03:26:03 - 00:03:30:22
We're going to have our next Markets Mindset on the heels of our annual survey that comes out.
00:03:30:23 - 00:03:31:22
So we'll discuss it then.
00:03:32:02 - 00:03:34:18
But that's a pretty big number
heading into next year.
00:03:34:21 - 00:03:36:03
That's going to be a record number almost.
00:03:36:06 - 00:03:36:21
Yeah.
00:03:36:23 - 00:03:38:05
And I mean, think about it.
00:03:38:07 - 00:03:39:11
You're going to have
00:03:39:11 - 00:03:45:01
$1 trillion capital need from the IG
markets between now and 2028,
00:03:45:01 - 00:03:47:18
just for data center driven supply.
00:03:47:18 - 00:03:52:08
On top of that, we expect an elevated
M&A environment.
00:03:52:10 - 00:03:56:22
I think anyone who is considering a transformational acquisition
00:03:56:22 - 00:04:01:21
is going to want to do it when the regulatory backdrop is fairly light.
00:04:01:23 - 00:04:04:03
So that's going to come into fold.
00:04:04:06 - 00:04:06:22
And we have close to $1 trillion
maturing next year.
00:04:06:22 - 00:04:08:14
So you add it all up.
00:04:08:16 - 00:04:13:13
$1.8 trillion, which I think is the old record,
feels eminently doable.
00:04:13:13 - 00:04:16:22
But it's a lot of supply for the market to digest.
00:04:17:00 - 00:04:19:23
And I think it's a price issue, not a capacity issue.
00:04:20:01 - 00:04:23:18
But we were dealing with nosebleed
type evaluation levels.
00:04:23:21 - 00:04:27:05
And I just don't think it can hold
given that supply backdrop.
00:04:27:07 - 00:04:27:19
I mean, you're right.
00:04:27:20 - 00:04:33:18
If supply continues, I mean, here we're at
almost approaching $250 billion of tech supply.
00:04:33:20 - 00:04:35:10
Not quite there yet, but pretty close.
00:04:35:12 - 00:04:37:12
That's a quarter of all corporate supply this year.
00:04:37:15 - 00:04:41:21
Now, interestingly enough, there was a change
in the composition of supply this year.
00:04:41:23 - 00:04:46:20
For the first, I'll call it what, nine and a
half months, duration reigned king.
00:04:46:22 - 00:04:48:22
Issuers wouldn't issue it.
00:04:49:00 - 00:04:50:20
Investors wanted to buy it all day.
00:04:50:22 - 00:04:52:08
And then something seemed to happen.
00:04:52:10 - 00:04:58:19
If you take a look, issuers issued
approximately $3 billion to $4 billion a week
00:04:58:19 - 00:05:02:18
of long-dated, 20-year-plus securities
every week through October.
00:05:02:20 - 00:05:07:09
And from the last week in October to today,
it's been about $11 billion
00:05:07:09 - 00:05:11:10
per week in 20-plus long-dated supply.
00:05:11:12 - 00:05:15:11
That's a big change from the issuers in terms
of the pace of long-dated supply.
00:05:15:13 - 00:05:18:19
At that same time, we also saw
underperformance of long-dated supply, right?
00:05:18:20 - 00:05:21:01
We saw this from some of our deals.
00:05:21:03 - 00:05:24:03
Some of the longer-dated deals, the
attrition rate, right,
00:05:24:03 - 00:05:27:19
the drop of the book from IPT heights
to pricing were over 60%.
00:05:27:19 - 00:05:30:19
And then we saw underperformance in the secondary market.
00:05:30:21 - 00:05:33:22
Do you think the performance
or the underperformance
00:05:33:22 - 00:05:36:12
was caused by the increased issuance?
00:05:36:14 - 00:05:41:11
Or do you think that the underperformance was caused by a change in investor sentiment
00:05:41:11 - 00:05:46:06
because of ambiguities around the Fed, the employment number, the new CPI.
00:05:46:06 - 00:05:47:10
We didn't have an October CPI.
00:05:47:10 - 00:05:50:03
All the data coming up in December, are people
just becoming more cautious?
00:05:50:03 - 00:05:53:21
I think it's 98% supply related.
00:05:53:23 - 00:05:57:11
The market got a ton of duration to digest.
00:05:57:14 - 00:06:00:20
I mean, remember you referenced
that Beignet transaction
00:06:00:20 - 00:06:06:01
when we first started this discussion, that had a weighted average life of close to 17 years.
00:06:06:03 - 00:06:08:10
Okay, so that was sold to our buyers.
00:06:08:12 - 00:06:08:21
All right.
00:06:08:21 - 00:06:11:05
And then on top of that, you had more supply.
00:06:11:06 - 00:06:15:05
So you've had a lot of duration and
it's coming from a sector
00:06:15:05 - 00:06:20:22
that one thing we know of is that they're going to come back and they're going to come back a lot.
00:06:21:00 - 00:06:25:14
So you basically had commodity duration
thrown at the market.
00:06:25:16 - 00:06:29:02
And I'm not surprised at all that the market
has taken a little bit of a pushback.
00:06:29:06 - 00:06:32:05
So do you think this outperformance is going to continue in the front end,
00:06:32:05 - 00:06:37:01
call it five years in, which is where you're seeing things outperform recently? In particular,
00:06:37:03 - 00:06:40:07
I mean, I take a look at one of the trades we worked on last week, the two-year floater
00:06:40:07 - 00:06:43:08
was probably one of the best performing
assets we've seen in a while.
00:06:43:11 - 00:06:46:12
I would call it more demand normalization.
00:06:46:14 - 00:06:47:06
But then–
00:06:47:06 - 00:06:49:14
More balanced at this moment than
having that strong bid
00:06:49:14 - 00:06:51:17
for duration that we had for most of the year.
-Exactly.
00:06:51:19 - 00:06:55:05
And Victor, the one other thing that we
haven't talked about for next year,
00:06:55:05 - 00:06:58:02
like we could talk about the
impact of supply on spreads.
00:06:58:04 - 00:07:01:21
What we don't know is the tail risk in the market.
00:07:01:23 - 00:07:08:08
And I think we have a market that has elevated
tail risk, especially for credit,
00:07:08:08 - 00:07:15:18
because this whole sell-off that we've seen in stocks, specifically in AI, has been credit related.
00:07:15:20 - 00:07:19:14
And we also know that assets under
management and private credit
00:07:19:14 - 00:07:22:04
have basically doubled in two years.
00:07:22:06 - 00:07:25:05
And the banks have had
excess liquidity deployed.
00:07:25:07 - 00:07:29:16
Mistakes are going to be made and probably
may very well have been made.
00:07:29:18 - 00:07:34:14
And we know that they'll get magnified
10x when they happen
00:07:34:14 - 00:07:37:21
to make them feel a lot worse than
they actually are.
00:07:37:23 - 00:07:42:17
So what I'm trying to say is that this
spread outlook I'm giving you
00:07:42:17 - 00:07:45:21
doesn't factor in those tail risks materializing.
00:07:46:01 - 00:07:53:12
If those tail risks are materializing, that view
gets that much more accentuated.
00:07:53:14 - 00:07:57:19
So I think it's safe to say you're a little
bit bearish on spreads.
00:07:57:21 - 00:07:58:13
Yeah.
00:07:58:15 - 00:07:59:09
Okay.
00:07:59:12 - 00:08:03:02
Katie Lavino has dialed in a question from Staten Island, New York,
00:08:03:02 - 00:08:04:12
longtime listener, first time caller.
00:08:04:17 - 00:08:10:06
And she wants to know that over the course of time, you've talked a lot about the $7 trillion
00:08:10:06 - 00:08:11:21
that are sitting in money market funds
00:08:11:21 - 00:08:16:15
as a backstop that would push out the curve
and start buying spreads.
00:08:16:17 - 00:08:21:21
One, how do you factor that view
into being bearish on spreads?
00:08:21:23 - 00:08:25:17
Or two, do you just see it that that's part of what's going on here in the front end of the curve
00:08:25:17 - 00:08:31:00
is that those assets are pushing out, looking
for yield, looking for additional spread?
00:08:31:02 - 00:08:32:21
How does that factor in now, given your view?
00:08:32:21 - 00:08:38:05
Well, I think the migration out
of cash has reversed
00:08:38:05 - 00:08:44:05
in the past couple of weeks, given everything
that's been going on that's AI related.
00:08:44:07 - 00:08:48:11
So you've seen cash levels actually increase
over the past couple of weeks.
00:08:48:14 - 00:08:52:15
So I think last data I checked, that's
close to $7.7 trillion.
00:08:52:15 - 00:08:55:20
Is that a backstop for the market?
00:08:55:22 - 00:08:58:12
Yeah, I think it is a long-term
backstop for the market.
00:08:58:14 - 00:09:01:20
But the question is, at what level?
00:09:01:22 - 00:09:05:22
Because you're dealing with a situation
that if you spread it out,
00:09:05:22 - 00:09:09:00
has some potential systemic concerns.
00:09:09:02 - 00:09:11:22
And we know people will feed off of that.
00:09:12:00 - 00:09:16:16
So cash isn't necessarily something that's
burning a hole in people's pockets.
00:09:16:16 - 00:09:19:13
So you think if that treasury curve
continues in the front end,
00:09:19:13 - 00:09:22:01
at least to flatten and invert in some cases,
00:09:22:01 - 00:09:24:03
that cash is going to go back to
where it was a few years ago.
00:09:24:03 - 00:09:28:00
It's going to stay in cash because
it's earning an outsized return.
00:09:28:02 - 00:09:32:21
And you made the point too, is we don't know what's going to happen with the Fed now.
00:09:32:23 - 00:09:33:19
Right?
00:09:33:19 - 00:09:38:17
And again, if I'm sitting in cash and there's
a lot of volatility in the risk markets,
00:09:38:17 - 00:09:41:10
let's see what happens with the Fed.
00:09:41:12 - 00:09:44:00
So Moshe, switching topics here quickly to hybrids.
00:09:44:02 - 00:09:46:13
A lot of changes have gone on in hybrids over
the last two or three years.
00:09:46:18 - 00:09:48:20
Supply has ballooned the last two years.
00:09:48:22 - 00:09:50:02
The structure has changed.
00:09:50:04 - 00:09:52:18
We're now, the dominant structure
is the use of the floor,
00:09:52:18 - 00:09:56:19
which I don't mind saying, Mizuho was the
pioneer in terms of getting the floor approved.
00:09:56:22 - 00:09:59:20
It's been one of the last salient
changes in hybrid structures
00:09:59:20 - 00:10:02:08
in the last decade, you could arguably say.
00:10:02:13 - 00:10:09:01
But my question is, it's become more mainstream, it seems, or going outside its normal avenues.
00:10:09:04 - 00:10:10:14
It's going outside the utility space.
00:10:10:19 - 00:10:14:00
We saw Verizon do an extraordinarily
successful trade in euros,
00:10:14:00 - 00:10:18:05
slightly different structure than we use in the States, but incredible trade
00:10:18:05 - 00:10:20:14
that came well through its dollar equivalents.
00:10:20:16 - 00:10:22:11
We obviously saw CVS use it at one time.
00:10:22:13 - 00:10:25:07
There's a lot of dialogue going around on hybrids.
00:10:25:10 - 00:10:29:07
Where do you see the use of them going
forward in some of the sectors you cover
00:10:29:07 - 00:10:35:01
in the broader space of M&A or
in rating agencies and other industries?
00:10:35:03 - 00:10:38:16
I think you're going to see it playing
a much more prominent role
00:10:38:16 - 00:10:40:00
in M&A than you have done in the past.
00:10:40:02 - 00:10:45:07
Now, for some of these mega acquisitions with mega companies buying each other,
00:10:45:07 - 00:10:50:10
then probably not, because it's going to take
too much to move the leverage needle.
00:10:50:12 - 00:10:57:12
But those companies with that sub,
call it $20 billion debt portfolio,
00:10:57:12 - 00:11:01:22
who are doing an acquisition and where
some form of equity is
00:11:01:22 - 00:11:06:12
needed from a balance sheet perspective, 100%, that's going to be part of the dialogue.
00:11:06:12 - 00:11:07:15
Okay.
00:11:07:15 - 00:11:13:09
What we've seen, if you have a stable market,
and we have the floor reset structure
00:11:13:09 - 00:11:18:16
that you spoke about, there's a lot of capacity
for that type of structure.
00:11:18:18 - 00:11:25:03
So, Moshe, let's finish on a prognostication,
and you can't equivocate on this.
00:11:25:05 - 00:11:29:09
We don't really have a ton of data coming up that's
00:11:29:09 - 00:11:33:05
that important until we get to CPI
and the FOMC meeting.
00:11:33:07 - 00:11:34:17
We've had a lot of different calls here.
00:11:34:18 - 00:11:35:19
Are they going to ease or not ease?
00:11:35:21 - 00:11:39:07
I remember at one time a Fed ease in
December was down to 35%.
00:11:39:07 - 00:11:41:10
Now we're back up into the 70s.
00:11:41:12 - 00:11:44:08
What's your call for an ease or not an ease?
00:11:44:10 - 00:11:47:07
And what's your call for the leaning on the commentary afterwards?
00:11:47:09 - 00:11:50:13
I think it's a reluctant cut.
00:11:50:15 - 00:11:54:15
And I think that because in the absence of data,
00:11:54:15 - 00:11:58:09
this Fed has shown tendency to be
hawkish rather than dovish.
00:11:58:11 - 00:12:00:19
And what happens if they don't cut?
00:12:00:21 - 00:12:04:13
I think if they don't cut, it's a dovish pause.
00:12:04:15 - 00:12:09:17
So I frankly don't see a huge delta between a dovish pause and a reluctant cut.
00:12:09:19 - 00:12:10:06
Okay.
00:12:10:08 - 00:12:12:19
Well, Moshe, thanks again for being here on Markets Mindset.
00:12:12:21 - 00:12:14:12
And I look forward to seeing you next time.
00:12:14:14 - 00:12:17:06
We're going to actually be doing one shortly
00:12:17:06 - 00:12:20:16
when we get all the responses from our annual survey in, over 300 accounts,
00:12:20:16 - 00:12:25:04
coming back on 20 of the most important
questions of the day for 2026.
00:12:25:09 - 00:12:26:11
I hope you'll all join us.
00:12:26:13 - 00:12:27:23
But until then, thanks again.
00:12:28:01 - 00:12:28:07
Take care.